Speculation is growing in Europe over whether Spain will request a full bailout to tackle its increasingly difficult economic and financial situation. The centre-right Government, led by Prime Minister Mariano Rajoy, has so far resisted asking for such help, which, if requested, would certainly plunge the eurozone into a fresh crisis.

The economic and social situation in the country is indeed stark- Anthony Manduca

The economic and social situation in the country is indeed stark. Spain has a deficit of close to nine per cent and the highest unemployment rate in the EU, 25.1 per cent or 4.7 million people. The economy is expected to shrink both this year and next. Youth unemployment is at high as 52.9 per cent. Half a million homes have no breadwinner and the Catholic charity Caritas says it now looks after one million people.

The difficult situation has also taken its toll on national events. On Friday, for example, Spain observed its National Day in a sombre mood as the traditional military pageant was scaled back to cut costs. King Juan Carlos presided over a much reduced parade that featured none of the usual fighter jets or tanks. Instead, there were 2,600 marching soldiers, 50 armoured cars and seven trainer aircraft.

Rajoy has introduced austerity measures aimed at tackling the huge deficit, but some critics argue that such policies might go too far and prevent economic growth taking off. Of course, when aiming for sustainable public finances, a government always has to balance the need for economic growth with the requirement to cut the deficit. It is in fact a difficult balancing act.

Rajoy recently presented an austerity Budget for 2013 in which he cut government spending by 8.9 per cent and froze public sector pay (for the third year in a row). A pension reform plan was also announced and a 20 per cent tax on lottery prizes (Spanish are avid lottery players) above €2,500 was introduced. In a move greatly welcomed by the European commission an independent authority is to be set up to oversee government finances.

The belt-tightening by Madrid has increased tension between the central government and the country’s semi-autonomous regions, where some dismissed Friday’s National Day. Twelve schools in Catalonia, for example, ignored the holiday while in Barcelona there were clashes between pro- and anti-independence Catalans.

The huge debt accumulated by Spain’s regional governments is in fact a major cause of the country’s difficult financial situation. The regions fund most of their social services sector, as well as education and health, and in previous years spent lavishly on infrastructural projects. Last Tuesday, for example, the regional government of Andalucia asked Madrid for a €4.9 billion bailout. Andalucia is the most populated region in Spain and has a jobless rate of 33 per cent.

Five other regions, namely Valencia (which built an airport which has never been used), Murcia, Castilla-La Mancha, the Canary Islands and Catalonia have all requested financial aid from the Spanish central government, and Catalonia has already started receiving funds. Together, the regions need to refinance €36 billion in debt this year.

In further bad news for Spain the ratings agency Standard & Poor’s last week downgraded the country’s credit rating, and warned of possible further downgrades. “The downgrade reflects our view of mounting risk to Spain’s public finances, due to rising economic and political pressures,” it said. “The deepening economic recession is limiting the Spanish government’s policy options”.

Spain’s economic problems are different to that of Greece, Portugal and Italy, all of which have too much debt (although Greece is by far the worst of the three). Up until the eve of the 2008 financial crisis Spain more or less ran a balanced Budget every year and its economy enjoyed strong growth. After Spain joined the euro it experienced an economic expansion and a property boom financed by cheap loans. House prices rose by 44 per cent from 2004 to 2008, and since the property bubble burst they have fallen by 33 per cent. The Spanish Government then had to borrow heavily to tackle the property collapse, recession and vey high unemployment.

It is also a fact that the previous Spanish Socialist Government of Jose Luis Zapatero had long lived in denial about the collapse of the property boom and Rajoy, who was elected in a landslide last year, inherited a very difficult situation. Austerity measures are unfortunately inevitable, and the Spanish Prime Minister has a very difficult task ahead of him.

Spain has already asked for – and its request was accepted – €100 billion in eurozone funds to help its banking sector. An independent audit of the banks a couple of weeks ago confirmed that the banks would in fact need €56 billion in capital to make up for the losses they could suffer on all the loans they made to property developers and mortgage borrowers during the property bubble. The eurozone funds for Spain’s banks technically do not qualify as a bailout – the funds come from the Eurozone’s European Financial Stability Facility and the European Stability Mechanism – so there have been no harsh conditions applied to the granting of these funds, as is the case with Greece which had savage austerity measures imposed on them by the EU, IMF and European Central Bank. But how long will Spain to able to withstand such pressure to ask for a full bailout?

• The decision by the Norwegian Nobel Committee to award its annual Peace Prize to the EU is a just recognition of the EU’s massive achievements over the last six decades. Despite the many problems being encountered by the eurozone today, the EU’s contribution to peace in the region as well as its consolidation of democracy in countries emerging from dictatorships, have been justly recognised.

Perhaps former Spanish Socialist Prime Minister Felipe Gonzalez got it right when he described the European Union as “the best thing since the Renaissance”.

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